Grain production profitability factors in Ukraine during the war

UkrAgroConsult

Article author:

Elizaveta Malyshko

Head of Market Research

In March-May, domestic grain prices dropped significantly by about 30%. Declining prices accompanied by rising production costs lead to “price scissors”, which cut down farmers’ revenues.

The situation is exacerbated by the hryvnia devaluation and the lack of VAT export refund.

VAT export refund

VAT was not refunded to exporters 4 months starting from late February.

In Ukraine stop of VAT export refunding was practiced in the past. For example, in the second half of 2017/18 MY, VAT refunds on soybean exports were suspended, and soy planted area reduced to the level of 2012/13 MY. In other cases the stop of VAT refund was also  followed by a decrease in a crop production margins and planted areas reduction.

On June 10, Chairman of the Parliamentary Committee on Finance, Tax and Customs Policy, stated VAT refunds had been resumed. Exporters confirmed this – new tax returns are registered and previous debts are paid. The VAT refund renewal can be a factor in maintaining domestic prices, and also helps prevent further losses of the farmer’s margin.

Devaluation

A significant devaluation of the hryvnia was observed in the 2014/15 season. The devaluation was one of the reasons for the reduction of grain areas in favor of more profitable oilseeds. However, the effect of devaluation was short-lived. A crop cultivation profitability  still is considered as being the crucial factor in farmers decisions making.

For a Ukrainian farmer, the cultivation margin usually grew during the hryvnia devaluation. The exchange rate weakening created additional profits in the Ukrainian currency, as usually imported inputs were bought at a lower rate than grain sold later in 3-6 months. However, this additional profit is possible only if the grain exports valumes are high enough. In 2022 (and possibly even in 2023), grain producers won’t  get an extra money from the curerncy devaluation due to low grain exports.

Low domestic prices are reducing farmers’ profits in March-June 2022. The margin moves to the logistics sector. So, logistics sector will become more attractive for investors than crop cultivation. In case of a long war, starting from 2023, the farmer’s efforts will focus not on growing rich harvest, but on how the most effectively store and deliver new harvest.

UkrAgroConsult published new crop production and export estimates in the latest ‘BLACK SEA GRAIN’ Weekly Report by UkrAgroConsult.

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Tags: Ukraine, grain, profitability